If the IRA invests in an investment partnership that uses debt or leverage, I believe the IRA ceases to be an IRA. Using debt within an IRA is a prohibited transaction

I was told by a CPA who specializes in private investment partnerships that this is allowed, but any gains attributed to the leverage are UBTI and thus taxable. It came up in the context of investing IRA funds in a private investment partnership (i.e. hedge fund) which uses leverage.

When it comes to brokerage accounts, IRAs are “cash accounts” and may not use margin to buy stocks (or other forms of debt-leverage for purchasing stocks). If an IRA invests in a hedge fund or other investment company that uses leverage, that is tantamount to breaking the rule on the use of leverage. The consequence is the generation of UBI from the income in the hedge fund and taxes on that income (UBIT).